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FINRA Issues Guidance on FOCUS Reporting for Operating Leases

On March 19, the Financial Industry Regulatory Authority, Inc. (FINRA) released Regulatory Notice 19-08 to provide guidance to members for reporting lease assets and liabilities on their FOCUS reports. FINRA’s notice follows an October 2018 No-Action Letter (the No-Action Letter) in which the staff of the Securities and Exchange Commission’s Division of Trading and Markets (the Staff) addressed the treatment of operating leases under Securities Exchange Act Rule 15c3-1 in connection with the Financial Accounting Standards Board’s Accounting Standards Update for Leases.

Rule 15c3-1(c)(2)(iv) generally requires broker-dealers calculating net capital to deduct fixed assets and assets that cannot be readily converted into cash from their net worth. Consequently, absent relief, a broker-dealer lessee would be required to deduct its operating lease from its net worth when computing net capital. In its No-Action Letter, the Staff explained that, subject to certain conditions, it would not recommend enforcement action to the SEC if a broker-dealer:

  1. computes net capital by adding back an operating lease asset to the extent of the associated operating lease liability; and

  2. does not include in its aggregate indebtedness an operating lease liability to the extent of the associated operating lease asset for purposes of calculating its minimum net capital using the aggregate indebtedness standard.

Building on the No-Action Letter, FINRA’s notice provides guidance regarding the reporting of an operating lease asset and an operating lease liability on FOCUS Report Part II, Part IIA and Part II CSE. Members should follow such guidance in their FOCUS reports going forward but are not required to refile previously submitted FOCUS reports to comply with the guidance.

Regulatory Notice 19-08 is available here.


©2020 Katten Muchin Rosenman LLP


About this Author

Michael T. Foley, Katten, Lawyer, Finance, FINRA, Chicago
Special Counsel

Michael Foley represents broker-dealers, investment advisers and other financial services industry participants with respect to a broad spectrum of legal and regulatory matters arising under the federal securities laws.

Michael has nearly 20 years of experience in private practice and in-house at both a large, full-service broker-dealer and at an online discount broker-dealer, advising broker-dealers and other financial institutions regarding compliance with the federal securities and commodities laws, and with the regulations of the US Securities and Exchange...

Laura Krcmaric, Financial Services Attorney, Katten Law Firm

Laura Krcmaric represents clients in the financial services industry, focusing on regulatory and compliance work. Prior to joining Katten, Laura served as counsel for Credit Suisse, where she provided advice to the private banking and wealth management division. She also was an honors intern with the Securities and Exchange Commission.

While in law school, Laura served as a staff member and symposium editor for the North Carolina Law Review. She also was a member of the Community Development Law Clinic, representing nonprofit organizations.